What is the main problem of the Bangladesh economy now? What policy steps are needed to solve the problem?
Bangladesh took quick and decisive policy actions to address the economic fallout of the COVID-19 pandemic, which helped facilitate a faster and robust recovery. But as with countries around the world, Russia’s war in Ukraine has also had a significant impact on Bangladesh.
Rising global commodity prices, supply disruptions, and slowdown in external demand have led to a sharp widening of Bangladesh’s current account deficit, depreciation of the Taka and a decline in foreign exchange reserves.
Bangladesh is taking a comprehensive set of measures to deal with these latest economic disruptions. The authorities have tightened the monetary stance, allowed for a more flexible exchange rate, imposed temporary restrictions on non-essential and energy-related imports and adopted measures to reduce electricity demand. Steps are also being taken to reprioritize spending to protect the vulnerable.
Bangladesh’s request for an IMF-supported programme is part of these comprehensive set of measures to cushion its economy.
Going forward, in the near-term, policy priorities must focus on containing inflation, softening the impact of these economic disruptions on the vulnerable, and building external resilience through continued exchange rate flexibility.
But the current crisis has also highlighted the need to expedite long-standing structural reforms to accelerate growth, attract private investment, enhance productivity, and build climate resilience. Foremost in this effort is the challenge of raising more tax revenues, which is critical to increase spending in critical areas, including education, health, and public investments to create a conducive environment for growth. An enhanced revenue base is also needed to support the poor and vulnerable. This will require a modernization of the tax system and improvements in revenue collection.
Bangladesh also needs a more efficient financial sector to improve credit allocation to the most productive economic sectors. This will require a reduction of the government’s role in the allocation of credit, as well as enhancement in the effectiveness of banking regulation and supervision, and improvements in corporate governance and legal systems.
The government projected 7.5 per cent GDP for the upcoming 2023-24 budget. Economists say, it is too optimistic in the context of the present economic situation. Do you think this is achievable?
Russia’s war in Ukraine interrupted the robust recovery from COVID-19 pandemic and created new challenges. The authorities have taken comprehensive set of measures to address these challenges. Sustained external pressure, stringent demand control measures, and loss in purchasing power from high inflation continue to weigh on the near-term economic outlook. Growth is projected to slow to 5.5 percent in FY23, before rebounding to 6.5 percent in FY24. However, there are considerable uncertainties surrounding this outlook stemming from external headwinds.
Despite these challenges, Bangladesh’s favorable demographics present a significant opportunity. To harness this potential, the country must continue reforms to make its economy more resilient.
Foremost in this reform effort is the long-standing challenge of raising tax revenues, which is critical to increase social, developmental and climate spending. This will require modernization of the tax system and improvements in revenue collection. Financial sector reforms to enhance banking regulation and supervision, and improved corporate governance and legal systems remain important. Maintaining robust economic performance will also require an increase in productive investments supported by a modernized policy framework.
These reforms—combined with efforts to boost private investments and export diversification—will help create conditions to make Bangladesh’s economy more resilient, and support long-term, inclusive and sustainable growth as well as help tackle climate change – an important risk for future growth.
The inflation rate was 9.33 per cent in March – it went up again. But the government recently projected it to be 6 per cent in the 2023-24 budget. But there are no clear-cut measures to control inflation. What do you think?
Like many countries around the globe, the unprecedented rise in global food, energy, and other commodity prices pushed inflation in Bangladesh to a decade high of 9.5 percent year-on-year in August 2022. Rising domestic food and fuel prices and the pass-through of large taka depreciation has kept inflation elevated.
Bangladesh Bank has tightened the monetary policy stance by increasing the benchmark repo rate by 125 bp cumulatively since May 2022 to 6 percent and signaled further tightening bias for FY24. In addition, the central bank continued mopping up liquidity from the banking system through unsterilized foreign exchange interventions and relaxed lending interest rate caps on selected products including consumer loans.
Monetary policy stance should be guided by inflation outlook and the authorities should stand ready to continue calibrated tightening to keep inflationary pressures in check, while carefully safeguarding economic growth amid already curtailed domestic demand.
Looking ahead, modernizing monetary policy framework and moving toward interest-rate based monetary system should also contribute to preserving price stability.
The government always tables a big size of Social Safety Net (SSN) programme. But in reality, the programme size is smaller, it may be almost half than govt what shows. Is the IMF concerned about this issue? Why?
As highlighted in the IMF’s 2021 Staff Report, Bangladesh has achieved significant progress in social outcomes despite public spending remaining low. Bangladesh’s Social safety net programs and social spending on health and education have contributed to poverty reduction and improvement in social outcomes.
Going forward, mobilizing resources to sustainably finance higher health and education spending will be critical in facilitating inclusive growth. Expanding coverage, strengthening benefit adequacy, and improving efficiency of social safety net programs will help build resilience against economic and environmental shocks.
Reforms under the IMF-supported program aim to create additional fiscal space through higher revenue mobilization and rationalizing expenditures to increase growth-enhancing spending. Social spending under the program, which includes spending on social safety nets as well as spending on health and education, is expected to increase over the next three years, anchored by quantitative targets on social spending. The program also seeks to support the authorities’ efforts to improve the targeting of social safety net programs and thereby their effectiveness.
In 2026, if Bangladesh graduates from Least Developed Country, some aid/support from developed countries will be withdrawn. What does Bangladesh have to do now to prepare for that?
To successfully graduate from Least Developed Country status and achieve middle-income status by 2031, it is important to build on these past successes and address structural issues to accelerate growth, attract private investment, enhance productivity, and build climate resilience.
As Bangladesh starts to lose preferential trade arrangements following Least Developed Country graduation, diversifying exports and maintaining competitiveness would be important for growth acceleration. Reducing relatively high nontariff barriers and domestic protection, improving trade-related infrastructure— especially energy and transportation, addressing regulatory barriers, and ensuring financing will be necessary to increase export competitiveness and expand trade.
Modernizing monetary, fiscal and financial frameworks, strengthening governance, and improving investment climate will be important to attract financing as Bangladesh gradually lose access to concessional financing. Similarly, reforms to increase FDI inflows is crucial for taking advantage of global value chains, raising productivity, and acquiring new knowledge and technology.
Given Bangladesh’s unique vulnerabilities to the threats of climate change, managing the fiscal, monetary and financial stability risks from climate change—and building economic resilience to such shocks going forward—are also critical.
IMF approved the loan proposal of Bangladesh last January. How will this help Bangladesh overcome the enormous challenge it currently faces? What kind of reforms do you expect, especially in the financial sector?
As mentioned, Bangladesh’s request for an IMF-supported program is part of the authorities’ comprehensive set of measures to cushion its economy from the disruptions caused by the ongoing Russia’s war in Ukraine. The goals are clear: in the near-term, to preserve macroeconomic stability, and in the long-term, to address structural issues to support strong and inclusive growth in line with the authorities’ 8th Five Year Plan.
In the context of financial sector policies, the banking sector has played an important role to cushion the COVID-19 shock. However, the sector, in particular state-owned commercial banks, were weak before the crisis and the shock has further increased existing vulnerabilities. Monitoring bank asset quality closely and ensuring adequate capital buffers remain important.
Structural weaknesses in supervision, regulation and governance, coupled with high non-performing loans and low capital in state-owned commercial banks could be a drag on medium-term growth prospects. Reform priorities include addressing the issue of high non-performing loans, strengthening banking regulation and supervision, improving corporate governance, and reforming legal systems to increase private sector credit allocation. Efficient financial resource allocation with an effective banking sector would help accelerate the recovery and restore the robust growth momentum.
Developing further the bond markets should also be a priority to meet the growing financing needs, especially after Bangladesh graduates from the Least Developed Country status in 2026. Further reforming National Savings Certificates system and developing secondary market for government securities will be important.